Kigali — The Rwandan Franc depreciated by 0.4 % against the US Dollar, 3.7% against the the British Pound in the first quarter of this year forcing the Central bank to push its key repo rate slightly higher, a move that would tempt commercial banks to increase their interests.

The decrease in value, according to Central Bank Governor Claver Gatete is due to price fluctuations of food, fuel globally moving points higher, the crisis in the Euro zone and political up rising in North Africa and Asia last year.

The National Bank of Rwanda therefore decided to increase its Key Repo Rate to 7.5% up from 7% to 7.5% last Friday, in a move it defends is meant to cushion inflation levels that pushed to 8.18% last month up from 7.85% in February this year.

This was occasioned by drastic increase in Food and non-alcoholic beverages prices which climbed by 4.37% between February and March due to a 10.55 rise in the prices of vegetables, according to the National Institute of Statistics of Rwanda (NISR), the country’s statistics body.

The key Repo rate is the rate at which the central bank lends to commercial banks which means that any increase in the rate affects the liquidity in the banking sector.

There are fears from the business community that increase in central bank’s lending rates would force commercial banks to increase interest rates on new and existing loans rendering borrowers difficulty in debt servicing, increasing cost of production and reducing demand and production.

“When banks increase interest rates our businesses have to be affected because most depend on loans to operate,” John Gabo a businessman said.

But Central bank Governor Claver Gatete says that increase in repo rate does not translate to commercial banks increasing their interest rates and noted that the move to increase repo rates was the right move to bring down inflation and cushion the economy from volatile global crises and fuel price increases.

“We are taking measures giving ourselves room so that if anything happens then we are prepared,” he said. Despite the increase in inflation which has been maintained in single digits, the country has managed to keep the economy afloat thanks to Central Bank’s strong fiscal measures.

He added, “In as much as we do our best, we could not have contained the situation in single digits… so we had to approach government with all the economic ministries and agreed to see how they become part of the process and that why they took some fiscal measures like reducing fuel prices,” he added

Moreover, these measures were translated into the franc’s strength against regional currencies in the first quarter of this year.

Last year Rwandan Franc gained against Tanzanian Shillings by 5.8, Kenyan Shillings by 2.0 %, Uganda Shillings 3.9 % while Burundi francs was by 2.2 %.

This stability is attributed to high growth; stable single digit inflation pushed by stability in exchange rate macroeconomic stability has been sustained despite a depreciation of 0.4 %, 7 % for pounds and 3.6 % against the Euros.

“These performances were due to a high increase in net capital and financial transactions up from US$ 499.36 in 2010 to US$682.50 million in 2011 offsetting the persistent current account deficit.”Gatete said. Experts say that the stability in the country’s currency is attracting more people especially investors in keeping their money in francs rather than converting them to dollars. “When our money( francs) has strength we are able to trade freely without losing money in exchange rates”.

Moreover, improved payment system and conducive business environment are the key drivers to trade and economic growth that saw a surplus of US$234.54 in the balance of payments up from US$ 72.07 million in 2010.

Economists are optimistic that the region’s economy is set to rebound with the recent ease in inflationary levels of the five member states which is estimated to surpass IMF’s projections in 2011 that reduced the bloc’s growth by about 4 %.

Moreover, Uganda’s inflation eased to 28.8 % in March up from 25.4 % in February, Kenya slowed down by 01.1 points to 15.6 % from 16.7 % while Tanzania saw a reduction to 19.0 % up from 19.4 %, with Burundi rising to 24.5 % from 22.0 %

From : http://allafrica.com

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